How To Play Government Distortion Of The Markets: Take On Debt And Load Up On Property

There's nothing like a trade where the government is supporting
both sides.

So consider real estate.

Not only is the government trying to prevent declines in U.S.
real estate prices, but it's also pushing down the cost of debt
with its ultra-loose monetary policy.

And guess what people love to fund real estate purchases with?

Debt.

Thus the 'government distortion trade' is to fund yourself in
debt, and buy real estate. This is what most real estate
investment trusts and private property investors do. It's what
homeowners do as well, with mortgages.

And while Real Estate Investment Trusts (REITs) have already had
a nice year so far in the U.S., it's not like this market
distortion trade is finished. In fact it likely still has a very
long way to go.

Take commercial real estate, for example. According to the
Financial Times, the spread between U.S. treasuries
and commercial real estate yields is as wide as it was during
parts of the recent financial crisis. This means that selling
debt (taking a loan) and buying property earns a rich spread for
investors with access to cheap debt (note mortgage rates are near
record lows), even still, with much thanks to government
intervention in the markets.

So you can fight the tape, or you can play the terrain as it
stands... and buying property while selling debt is the trade
supported by government policy both right now and likely well
into the future, thanks to the political realities of a vast
American voting base comprised of homeowners.